- What is cheque clearing house?
- What is MICR code?
- What is Cheque Truncation System (CTS)?
- What are the benefits of Cheque Truncation?
What is cheque clearing house?
- Suppose a party from Delhi pays you via cheque of Citibank and you have account in SBI, Ahmedabad. You deposit this cheque in your area’s SBI branch.
- Now the SBI branch manager would send his [overworked, underpaid] Bank PO to Citibank’s office in A’bad. He’d show the cheque, collect the cash and return to deposit the money in your account.
- But SBI would be getting thosands of cheques everyday- some from ICICI, some from Citibank, some from axis and so on. SBI cannot send its staff to every other bank to get the cash, that’d be extremely time consuming.
- Therefore To simplify this cheque transection process, each bank will send a representative to a central place and exchange cheques drawn on each other.
- This centralized place is called clearing house/processing house.
- Reserve bank of India is act as clearing house.
- In cities where RBI’s office doesnot exist, usually SBI or other public sector bank acts as the clearing house.
What is MICR code?
- By seeing the PIN code, a postman can know the destination of an envelope. Same way by using the MICR code, RBI (clearing house) can know the name of a bank, location of its branch from where the cheque was issued= faster clearing of cheques.
- MICR = Magnetic ink character recognition.
- At the bottom of every cheque, you’d see some black colored numbers with weird looking fonts. That is the MICR code.
- These numbers are printed with a special ink containing iron oxide, so that it can be automatically read by a special machine.
- Ofcourse this sounds similar to bar codes, but there is a difference: unlike barcode, you can read the MICR code and decode it, without the use of special machines.
What is Cheque Truncation System (CTS)?
- Under the old paper cheque based clearing, the SBI bank will send the paper cheque to the clearing house and get the money and then transfer it to your account.
- This is still time consuming. because SBI (or any bank) would need to physically move the cheques to a clearing house.
- So RBI came up with a new idea known as ‘Cheque Truncation System (CTS)’.
- In this Cheque Truncation System (CTS), SBI branch will not send the paper cheque to the clearing house, but instead, it’d merely scan the cheque, and electronically send the image + MICR data, to the clearing house.
- From the clearing house, the data would goto the paying bank (Citibank in our example), they will inspect the MICR data, signature on the scanned image and release the money to SBI.
- This process is faster and more safer than the conventional paper-cheque clearing method.
What are the benefits of Cheque Truncation?
- It Eliminates the time, money and manpower wasted during physical movement of cheques (from banks to clearing house).
- Thus, Cheque Truncation =faster clearing = better service to customers,
- Cheque Truncation system reduces the scope for clearing-related frauds
- There is no fear of losing cheque in transit.
- In the year 2010, RBI came up with the guidelines for Cheque Truncation system. (CTS 2010)
- The banks would need to upgrade a few things to comply with CTS 2010 standards of RBI.
- For example, in their branch offices, they would need to buy scanners and install special software provided by RBI, to securely transfer and receive the scanned image and data.
- They may need to change the color-scheme of chequebooks so that signature and handwriting is visible in the scanned image. And so on…
- Problem: some jholachhaap banks, are yet to comply with RBI’s CTS 2010 guidelines.
- Hence recently RBI issued a warning to all banks: upgrade your banking infrastructure according to CTS 2010 guidelines, before the end of Sept. 2012
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